9911796707
TMI Blog1955 (8) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... tiffs Nos. 1 and 2 are shareholders of the mills company, which is a public limited company. Defendants Nos. 3 to 5 and 11 to 20 are shareholders of the mills company. Defendants Nos. 3 to 10 are directors of the company. All the shareholders support plaintiffs Nos. 1 and 2 in this suit. Plaintiffs Nos. 3 and 4 are unsecured creditors of the mills company. As most of the facts are not in dispute or really disputable, I shall first succinctly state the facts and history of the case and then summaries the contentions raised in the pleadings. In January, 1953, the financial position of the mills company was far from satisfactory. Several creditors had filed petitions in this court for compulsory winding up of the mills company and for appointment of a liquidator. The company's liabilities were approximately Rs. 1,00,15,000. The Bank of India Ltd., to whom about Rs. 32,00,000 were payable were secured creditors holding an equitable mortgage on the properties and assets of the mills company. There were fixed deposits of about Rs. 23,00,000 : about Rs. 35,00,000 were due to large creditors and about Rs. 11,00,000 were due to small creditors (whose claims were less than a lakh of rupe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same rate of interest and the company doth hereby authorize the lenders to negotiate for such loan. In the third alternative the lenders may arrange with the Bank of India Ltd. to extend for a further period the equitable mortgage now held by them for about Rs. 32,00,000 (Rupees thirty-two lakhs) advanced by them to the company. In the event of the second or third alternative being adopted the terms and conditions of redemption shall be as mentioned in clause 8 hereof and the lenders shall be entitled to receive and the company shall pay to the lenders the difference in interest, if any, between 6 per cent. and such lower interest, if any, payable under any English mortgage to any firm, association, bank, or person or persons, or any company under the continuation of the equitable mortgage in favour of the Bank of India Ltd. 8. The company shall redeem 20 per cent. of the debentures or shall repay 20 per cent. of the amount of first English mortgage as the case may be every year on or before 31st March provided always that the lenders shall not be entitled to call for or demand redemption of 20 per cent. of the debentures or repayment of 20 percent of the amount of the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 25,00,000 and the cash credit was secured by hypothecation of the goods belonging to the mills company including up to Rs. 5,00,000 against stocks in process, chemicals and stores with a stated margin. Both the loans of Rs. 25,00,000 advanced on the security of the mortgage and the cash credit account were guaranteed by Bachhraj Co. Ltd. Pursuant to this arrangement defendant No. 1 bank paid to the Bank of India Ltd. a sum of Rs. 6,49,707-7-2 out of the cash credit account and a further sum of Rs. 25,00,000. The two amounts were paid to the Bank of India Ltd. by defendant No. 1 bank by two cheques in full satisfaction of the claim of the Bank of India Ltd. against the mills company. This was the arrangement as to the quantum of the loan. The indenture of mortgage executed by the mills company in favour of defendant No. 1 bank did not, however, provide for repayment of the loan in yearly installments nor did it provide that the first two yearly installments were to be paid only in the circumstances specified in the agreement between Bachhraj Co., and the mills company. What the indenture of mortgage actually stated was as under : "Now this Indenture Witnesseth that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to an act of insolvency or if it appears to the mortgagees that the mortgagors are carrying on business at a loss and that the further prosecution by the mortgagors of their business will endanger the security of the mortgagees or any default shall be committed by the mortgagors in the performance of any of the covenants herein contained and on the part of the mortgagors to be observed and performed or if a distress or execution be levied upon the mortgaged property or if in the opinion of the mortgagees (which shall be final and conclusive) the security hereby created shall become insufficient to secure the mortgage debt with such margin as the mortgagees may consider reasonable or the guarantors Messrs. Bachhraj Co. Ltd., shall at any time request the mortgagees to demand payment from the mortgagors of the amount then due under these presents then and in any of the aforesaid cases notwithstanding anything herein contained to the contrary the whole of the mortgage debt shall at the option of the mortgagees become immediately payable as if the due date had then elapsed and the security hereby created shall at the option of the mortgagees become immediately enforceable." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attorneys of defendant No. 1 bank again addressed a similar letter to the mills company. On May 8, 1954, the attorneys of plaintiffs Nos. 1 and 2 addressed to the mills company a letter calling upon the mills company to take immediate steps to have the mortgage in favour of defendant No. 1 bank declared ultra vires and to restrain defendant No. 1 bank from enforcing the mortgage or taking any action under the mortgage. The plaintiffs filed this suit on May 11, 1954. On a notice of motion taken out by the plaintiffs an interim order was made by this court on May 24,1954, restraining defendant No. 1 bank from taking any action under the indenture of mortgage and from taking steps to enforce and realize the mortgage and from exercising any of the powers, including the power of sale, given to it under the indenture of mortgage pending the hearing and final disposal of the suit. In the suit filed by them the debenture holders had admitted and accepted the first mortgage in favour of defendant No. 1 bank and their prayer was to sell the property subject to the first mortgage. A notice of motion was taken out by defendant No. 1 bank in that suit for an order that the receiver appointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent of Rs. 5,00,000 which would otherwise have been utilized by it to carry on its business. The plaintiffs have also alleged that by not providing for the repayment of the loan in the course of five years and by not making a provision that the lenders would not be entitled to demand the first two installments if the mills company did not make sufficient net profits the mills company put itself at the mercy of defendant No. 1 bank. Another allegation contained in the plaint is that the challenged provisions were such as would render the scheme nugatory and make it impossible for defendent No. 2 company to carry out the scheme. Relying on these allegations the plaintiffs have submitted in the plaint that the indenture of mortgage executed in favour of defendant No. 1 bank is ultra vires, void, inoperative and of no effect. Defendant No. 1 bank by its written statement has relied on the fact that the loan actually given exceeded Rs. 30,00,000. The bank has denied that the provisions relating to repayment of the loan challenged by the plaintiffs are in contravention of the scheme or the agreement between the mills company and Bachhraj Co. Ltd. The bank has further contended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the suit by the plaintiffs and a number of issues were raised in respect of the same. It will be convenient to examine those contentions at this stage. The issue as to multifariousness was abandoned. It was pleaded that the suit related to the internal management of the mills company and, therefore, did not lie. But the contention was not pressed before me. Nor was the contention that Bachhraj Co. Ltd. were necessary parties to the suit pressed before me by the learned Solicitor-General, appearing for defendant No. 1 bank. In its written statement defendant No. 1 bank alleged that plaintiff No. 1 was described as a minor in the form filed by the mills company and plaintiff No. 2 's name did not appear as a shareholder at all in that form and, therefore, plaintiffs Nos. 1 and 2 were not entitled to maintain the suit. Some formal evidence was led before me to show that plaintiff No. 1 had attained majority prior to the date of the filing of the suit and also to show that in the register of shareholders maintained by the mills company both plaintiffs Nos. 1 and 2 were shown as shareholders. On the evidence led before me I am satisfied that plaintiffs Nos. 1 and 2 at all material t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anced under the indenture of mortgage challenged in the suit. It was also said that the mills company was under the financing agreement not to be under any obligation to pay the first two installments of the mortgage amount if the mills company did not make sufficient net profits. It was also said that the mortgage amount was to be paid in the course of five years whereas under the indenture of mortgage actually executed in favour of defendant No. 1 bank the mortgage amount was payable after one year. The plaintiffs have also relied on the clause relating to payment of interest as contained in the financing agreement and the one contained in the indenture of mortgage executed in favour of defendant No. 1 bank. The plaintiffs have also relied on the acceleration clause contained in the indenture of mortgage executed in favour of defendant No. 1 bank. Evidence was led before me on behalf of defendant No. 1 bank to show that the acceleration clause had been inserted in the indenture of mortgage in favour of defendant No. 1 bank at the instance of the solicitors of Messrs. Bachhraj Co. Ltd. and that this was done in pursuance of the provision in that behalf made in clause 10 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or in any other action in personam .. If the loan has been applied in payment of the debts or liabilities of the company duly incurred (whether accruing before or after the date of the loan) the lender although he knew the borrowing was unauthorized is entitled to recover the amount so paid and to that extent may hold any securities given to himself, but he is not subrogated to any securities or priorities or rights as to the interest of any creditor paid off with his money." Sir Nusserwanji Engineer also relied on a decision of the Privy Council in Premila Devi v. Peoples Bank of Northern India Limited [1939] 9 Comp. Cas. 1 PC. It was there held that the scheme of arrangement drawn up in respect of a company and sanctioned by the court under section 153 of the Indian Companies Act, 1913, becomes binding upon the company, its creditors and its shareholders, and its terms can be varied only by an order of the court when the terms of the proposed variation have been approved at meetings of creditors and shareholders. Accordingly, if a company or its directors or shareholders purport to alter the dates either by resolution or ratification by which dates, under a scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned and the financing agreement annexed to the same. It was said that the term relating to the period of five years and that preventing enforcement of repayment of any installments in the first two years was not a necessary condition nor a sine qua non of the transaction of mortgage. It was also said that in fact the mortgagee bank had taken a lesser security by giving cash credit facility to the mills company. Then it was said that if the bank had filed a suit to enforce the mortgage the court would have at the highest declined to enforce the mortgage in any other manner than in accordance with the terms of the scheme and the financing agreement, but the court would not have stated that the bank had no security whatever. As to the acceleration clause reliance was placed on clause 10 of the financing agreement and the evidence led for the purpose of upholding that clause. Reliance was placed by the learned Solicitor-General on a decision given by the Court of Appeal in England in Johnston Foreign Patents Co. Ltd. In re [1904] 2 Ch. 234 . In that case three companies each of which had power to borrow money on security of debentures, issued joint debentures, by which the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of his argument I put it to learned counsel whether the proposition would apply where under a scheme of arrangement a company was authorised to effect a lease of one of its properties for 20 years and a lease for 25 years was in fact effected by the company and the consideration was wholly executed by the lessee who had been put in and remained in possession as lessee for some years. It was said that the transaction would be altogether a nullity and the lessee in an action by the company would not be entitled to say that the lease should be treated as binding for 20 years and bad as to the rest of the period of the lease. It was said that in such a case the court would at the instance of the company compel the lessee to deliver back the possession of the property to the company. I have no doubt that this would not be the result. Instances could readily be multiplied for the purposes of testing the soundness of the proposition so broadly formulated. In support of the proposition reliance was placed on a decision of the Privy Council in Premila Devi v. Peoples Bank of Northern India Limited [1939] 9 Comp. Cas. 1: PC. , to which I have already made some reference. I have care ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Acts of the Legislature and decisions of great authority. But the application of the doctrine of ultra vires is not as imperious and as embracing as submitted by learned counsel for the plaintiffs. That submission seems to me to require the law to function with unmitigated rigour and to have destructive effects not necessitated by any sound principle underlying the doctrine. The main feature and the main facet of the doctrine of ultra vires is that a company having corporate persona should not be mulcted for its own act or an act of its agent if it is beyond its own powers or privileges. The company can have no agent to do that which is beyond the purpose of its creation or to do an act which the company itself was expressly or by necessary implication prohibited from doing. The doctrine seems to me, therefore, to be conformable to the rule that cases of total absence of authority are distinguishable from cases where the authority to do the act in question exists but the actual exercise of it is irregular, because the mode or manner of the performance of the act is in some respect different from that directed by the authorization. The present case illustrates the distinction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and the one strenuously pressed before me by learned counsel for the plaintiffs was that the clause for repayment of the loan was prejudicial to the shareholders and unsecured creditors of the company as it gave a go-by to the stipulations relating to the period of five years and of repayment by installments contained in the financing agreement. In my judgment it is undisputable that in this particular respect the commandment or authority was not properly pursued. This, however, amounted to excess in exercise of its commandment or authority by the company. It did not affect the purpose of the incorporation of the company. Nor did it affect the very factum or creation of the contract as sanctioned by the court but related to the mode or manner of performance or discharge of the contract and to that extent rendered the transaction irregular. It cannot be said that the authority was not distinctly pursued. The excess to my mind was not inextricably mixed up with the rest of the transaction and the boundaries between the excess and the rightful execution are distinguishable. Therefore, it can be said that although the mode or manner or machinery of repayment actually stipulated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mortgage has been redeemed shall be subrogated to the rights of the mortgagee whose mortgage has been redeemed, if the mortgagor has by a registered instrument agreed that such person shall be so subrogated." The law relating to subrogation to securities in case of ultra vires transactions of borrowing may be taken as laid down by the Court of Appeal in England in Wrexham, Mold and Connah's Quay Railway, In re [1899] 1 Ch. 440 . It was held in that case that where a company borrows money ultra vires, the lender, so far as the money is applied in the discharge of legal debts and liabilities of the company, is entitled to have the loan treated as valid, but he is not subrogated to any securities or priorities of the creditors who are paid by the means of his moneys. In that case a bank having advanced moneys for payment of interest on debentures issued by the railway company claimed priority as the assignee of the debenture holders, by invoking the doctrine of subrogation. In rejecting this claim Rigby L J. stated (page 455): "I think that the great preponderance of authority shows that the doctrine of subrogation has very little, if anything at all, to do with the equity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct in terms of the scheme. The plea was sought to be based on the general principle of equity, that those who pay legitimate demands which they are bound to meet, and have had the benefit of other people's moneys advanced to them for that purpose, shall not retain the benefit so as, in substance, to make those other people pay their debts. It was said on behalf of the bank that on the facts of this case the relief's asked for by the plaintiffs should not be granted to them even if the transaction between the bank and the mills company is held to be ultra vires the mills company. Moneys were given by the bank and were applied in the full discharge of the liability of the company to the Bank of India Ltd., and the bank held a security on the properties and assets of the company. The bank was further entitled to go into possession of the property mortgaged to it at any time in case of certain eventualities. This it tried to do but was restrained by an order and injunction passed by the court. The court of appeal, however, passed an order in favour of the bank and the bank has in fact entered into and continues to be in possession. This, it was said, was in any event in the purported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng power generally can be necessary for the purposes of the business of the society; therefore it is not upon the footing of an incidental or expressed power to borrow, that anything can be allowed in this case. When the documents are looked at, in which the agreements between this society and their bankers, the appellants, are embodied, it is perfectly apparent, that a course of dealing was contemplated and agreed upon between the bankers and the society, which was not authorised by the rules of the society ; and, consequently, that any benefit of the securities which were in the hands of the bankers at the time of the winding up, to which they may be legitimately entitled, is not founded upon those agreements, or upon that course of dealing ; that, so far as it depends upon the agreements and the course of dealing which was regulated by the agreements, the bankers are wrong, and the burden of showing that they are entitled to anything lies upon them, and not upon the other side. But there is an equitable principle, consistent with the law of which I have spoken, sound in itself, and also sufficiently established by authority, which may entitle them, nevertheless, to some benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be justice ; whether it is technical equity is a question which, I think, is not now before this House." Sir Nusserwanji Engineer, learned counsel for the plaintiffs, has argued that this equitable principle recognized and applied by the Court of Appeal in England in the Building Society's case [1882] 22 Ch. D. 61 is not applicable in India. Reliance was placed on the well-known principle that where there is a statutory provision, the courts should follow the statutory provision and they are not entitled to extend that provision by having recourse to any rules of equity. The argument proceeded that the whole law of subrogation in India was to be found in section 92 of the Transfer of Property Act. I agree that where there is a statutory provision, the court cannot extend the scope of that provision by incorporating in its decision any doctrine or principle of equity. I also agree that the law of subrogation in India is to be gathered from section 92 of the Transfer of Property Act. The proposition, however, pressed before me by the learned Solicitor-General cannot be regarded as an extension of the doctrine of subrogation. There is no question here of the quasi-lender claimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions ultra vires the company. Restitution in such cases is generally viewed with favour when it can be done without destroying other priorities and without affecting the rights of innocent third parties. Although restitution is by itself a distinct relief it is not dissociated from cases where substantial relief is claimed by a company on the ground of ultra vires. The extent to which restitution may be granted must of necessity depend on the facts of each particular case It is true that in the appeal that was carried to the House of Lords in the case of the Blackburn Building Society ( supra ) the House of Lords was not called upon to, and, therefore, did not, express any opinion on this vexed but interesting question. Lord Dunedin in his very interesting judgment in another case, Sinclair v. Brougham [1914] AC 398, 430-1 very cautiously referred to the effect of the decision of the Court of Appeal in the Blackburn Building Society's case ( supra ) and observed that the case dealt with the question of retention of the securities alone and not "the fate of a claim at the instance of the bank". It is also true that once the contract goes on the ground of ultra vires, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 bank was in the course of the arguments not confined to this limited aspect of the matter but principally was that in any event it was entitled to hold the security and enforce the same in terms of the contract annexed to the scheme sanctioned by the court. Then there is one more point with which I must very briefly deal. The suit is for a declaration and a permanent injunction. These are discretionary relief's. Therefore, even if I had reached the conclusion that the transaction of mortgage in favour of defendant No. 1 bank was ultra vires the mills company, I would in view of my decision that there is an equity which entitles the bank to retain the property and claim restitution, have had to consider whether any declaration of nullity should be given to the plaintiffs. No doubt a strong case of inexpediency is required before the discretion for refusing a declaratory relief is exercised where it is shown that the right to sue exists and the ultra vires nature of the transaction is established. But on the facts of the present case and in the view I take of the equity arising in favour of defendant No. 1 bank, I would have in exercise of that discretion declined to grant a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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